Nothing More than Feelings… For the Aussie Dollar

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The back page of today's Australian Financial Review has an illustration of a roided out Kangaroo, the kind you see on a one Australian dollar coin, but with Schwarzenegger like muscles. The story is called, 'Leaps and bounds in $A demand.'

'The historic changes in the market for Australian dollars,' begins the story, 'including quantitative easing, the global search for yield and demand from central banks, are likely to persist for several years....This means any business in currency sensitive areas such as tourism, manufacturing and retail should give up any hope of short-term relief from the intense pressure created by a strong dollar.'

Anyone who writes a story with that much conviction in today's world is begging for trouble. It's especially bold given the fact that Australia's third-quarter trade deficit more than doubled to $4.65 billion, according to figures released by the Australian Bureau of Statistics yesterday. The value of metal ores and minerals went down 15% during the quarter while coal, coke, and briquettes were down 8%.

Now, this was also the quarter in which iron ore prices plummeted to $80 per tonne. They have since rebounded to $120 tonne, which is still a lot lower than they were at $180 per tonne at their highs. The third-quarter deficit, then, is either anomalous, or reflects Australia's sensitivity to China, or both.

But from the perspective of the Aussie dollar and the bullish article in the AFR, it doesn't add up. The terms of trade are falling, the deficit is up, interest rates are lower than they were in 2009 and probably headed lower this year and next - and the Australian dollar is stronger? Clearly the Aussie dollar isn't trading based on economic fundamentals.

That means its trading on something else. And that something else is really just the feeling traders and investors have about other factors like QE. Feelings are not 'historic changes'. They are feelings. And they can change faster than you can say, 'Boom!'


Dan Denning for The Daily Reckoning Australia

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